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Chapter 6
Common Stocks
Common Stocks
Learning Goals
1. Explain the investment appeal of common stocks and why
individuals like to invest in them.
2. Describe stock returns from a historical perspective and
understand how current returns measure up to historical
standards of performance.
3. Discuss the basic features of common stocks, including
issue characteristics, stock quotations, and transaction
costs.
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Business risk
Financial risk
Purchasing power risk
Market risk
Event risk
compared
to
other
Residual owner
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New issuance
Public Offering
Rights Offering
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Stock Split
when a company increases the number of shares
outstanding by exchanging a specified number of new
shares of stock for each outstanding share
usually done to lower the stock price to make it more
attractive to investors
stockholders end up with more shares of stock that sells
for a lower price
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they
believe
stock
is
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Odd-Lot
Buying/selling less than 100 shares of stock
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Companies
dividends
are
not
required
to
pay
but
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Types of Stock
Blue Chip Stocks
financially strong, high-quality stocks with long
and stable records of earnings and dividends
Companies are leaders in their industries
Relatively lower
of company
risk
due
to
financial
stability
Chevron,
Johnson
&
Johnson,
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stocks,
small-cap
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Chapter 7
Analyzing
Common Stocks
Intrinsic Value
The underlying or inherent value of a stock, as
determined through fundamental analysis
Intrinsic value depends upon several factors:
Estimates of future cash flows
Discount rate
Amount of risk
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Activity Ratios
how well the company is managing its assets
Accounts Receivable Turnover
Inventory Turnover
Total Assets Turnover
Leverage Ratios
amount of debt used by the company
Debt-Equity Ratio
Times Interest Earned
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Payout Ratio
Book Value per share
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